If you have multiple federal student loans, one way to simplify the repayment process is by consolidating. A Direct Consolidation Loan combines different federal student loans into a single loan, resulting in one monthly payment.
This can be a helpful way to stay on top of student loan payments, and also set yourself up for eventual loan forgiveness, based on some requirements for different loan types and income-driven repayment plans.
Consolidation of student loans can lower your monthly payment by extending your repayment timeline; however, you typically end up paying more overall this way due to the additional interest you pay when lengthening your loan term.
It’s important to note that the application process for a Direct Consolidation Loan is available through the U.S. Department of Education and comes with no fees . Some private companies solicit offers to help people apply for consolidation for a fee, but there’s no need to pay for application assistance. The process takes about 30 minutes total and can be done online.
Considering the pros and cons of a Direct Consolidation Loan, such as lowering your monthly payments, can help determine if it’s the right repayment strategy for you. But make sure to run the numbers and see if the lengthened payback period or new interest rate will result in paying more than you are comfortable with in the long run.
Exploring Direct Consolidation Loans?
Deciding if consolidation is right for you depends on if your desire to simplify your payments outweighs the potential loss of some benefits. The first thing to consider is if you currently have multiple federal student loans with different servicers, meaning you have to log in to two or more separate accounts to pay your student loan bills each month.
Student loan servicers are companies such as Great Lakes or FedLoan Servicing that collect payments on your loans and maintain your records. In this instance, consolidation can make life a little easier because the process will give you a single loan with a single bill each month.
Consolidation can also lower your monthly payment amount, since a Direct Consolidation Loan has a repayment period of anywhere from the standard 10 years to 30 years .
Direct Consolidation Loans are eligible for multiple repayment plans, but on a Standard or Graduated plan, you must have less than $7,500 in total debt to have the maximum repayment time set at 10 years.
If your total debt is $60,000 or more, your Graduated or Standard repayment plan will be spread over 30 years. For all debt amounts in between, the term will be between 12 to 25 years for repayment. Plus, if you have any variable-rate loans, consolidation will make it so you are able to switch to a fixed interest rate.
Also, if you consolidate loans other than Direct Loans, such as Perkins Loans (drawn before the program was discontinued), those loans may become eligible for Public Service Loan Forgiveness (PSLF) once consolidated, whereas they were not eligible before.
Before you apply for a Direct Consolidation Loan, make sure you calculate how much you could end up owing over time, based on your new repayment schedule. And if there are Direct Loans you don’t wish to consolidate, perhaps because they are nearly paid off, you’ll still want to factor those payments in when calculating how much you can afford to pay each month on your consolidated loan.
As we mentioned, unless you have less than $7,500 in total debt, your repayment period will be extended beyond the standard 10 years, meaning you will make more payments and pay more in interest, unless you switch to a different student loan repayment plan. Consolidation can also cost you some benefits that only non-consolidated loans are eligible for, including access to some loan cancellation options. It’s a good idea to check in with your loan program before opting for a Direct Consolidation Loan.
However, one of the most important things to consider before consolidation is that if you are currently paying your loans using an income-driven repayment plan, or have already made qualifying payments toward PSLF, consolidating your loans will result in the loss of credit for payments already made toward loan forgiveness.
Applying for a Federal Direct Consolidation Loan
Almost all federal student loans are eligible for consolidation. If you have private education loans, you can not consolidate them with your federal loans. You can’t consolidate your loans while in school and must graduate, leave school, or drop below half-time enrollment in order to pursue consolidation. Parent PLUS loans can’t be consolidated with loans in the student’s name.
The Direct Loan Consolidation application process is available through StudentLoans.gov . You simply fill out the online application, or if needed, you can print out a paper version and mail it. To make things easier, it may help to gather all of your loan records, accounts, and bills on hand as you work through the form.
You can also select which loans you do and do not want to consolidate on your loan application. For instance, if you have a loan that will be paid off in a short amount of time, you might consider leaving it out of the consolidation, or if you have already made qualifying payments toward forgiveness on certain loans.
There might be other reasons you don’t want to include a certain loan in your Direct Consolidation Loan—consider the features of each individual loan before deciding whether to consolidate. Of course, if you keep one or more loans out of the Direct Consolidation Loan, you’ll end up with at least two different payment plans and monthly student loan bills.
Remember to keep making payments on your loans during the application process, until you are notified that they have been paid off by your new Direct Consolidation Loan. Your first new payment will be due within two months of when your Direct Consolidation Loan is first paid out.
Repayment Plans for Consolidation Loans
A Direct Consolidation Loan will have a fixed interest rate. The fixed rate will be the weighted average of all of the interest rates for the loans you are consolidating—rounded up to the nearest one eighth of a percent. This means that the interest rate on your largest loan will have the most impact on your consolidation interest rate, whether that interest rate is high or low.
When you apply for a Direct Consolidation Loan, you must also be prepared to select a repayment plan. Many repayment plans, including income-driven repayment plans, are available for Direct Consolidation Loans.
Consolidation can also help student loans that are currently in default . Student loans will go into default after 270 days without payment, which can result in consequences and loss of benefits, such as damaging your credit score or possible wage garnishment.
Since loans in default are accelerated, and the entire unpaid balance becomes due when you enter default, consolidation is worth considering since it allows you to pay off one or more federal student loans with the new Direct Consolidation Loan.
Once your consolidated loan is out of default, you can repay the Direct Consolidation Loanunder an income-driven repayment plan or make three consecutive.. Direct Consolidation Loans are eligible for benefits such as deferment, forbearance and loan forgiveness.
Refinancing vs. Consolidation for Student Loans
For those interested in a better interest rate or more favorable loan terms you could consider refinancing your loans instead. You can apply for student loan refinancing with companies like SoFi, and the process works much in the same way. But unlike consolidation, refinancing can combine federal student loans and private loans, if you are still looking to make only one monthly payment.
Keep in mind refinancing can result in the loss of some of the benefits for federal student loans under consolidation since you’re working with a private company and not the government. However, for someone looking for lower interest rates or lower monthly payments, refinancing is another option to consider.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.